The statements contained in this report that are not statements of historical
fact, including without limitation, statements containing the words "believes,"
"expects," "anticipates" and similar words, constitute forward-looking
statements that are subject to a number of risks and uncertainties. From time to
time we may make other forward-looking statements. Investors are cautioned that
such forward-looking statements are subject to an inherent risk that actual
results may materially differ as a result of many factors, including the risks
discussed from time to time in this report, including the risks described under
"Risk Factors" in any filings we have made with the SEC.
Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The
preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses.
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On an on-going basis, we evaluate these estimates, including those related to
useful lives of real estate assets, bad debts, impairment, contingencies and
litigation. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
There can be no assurance that actual results will not differ from those
estimates.
Background
Electromedical Technologies is a bioelectronics manufacturing and marketing
company. We offer U.S. Food and Drug Administration (FDA) cleared medical
devices for pain management.
Bioelectronics is a developing field of "electronic" medicine, which uses
electrical impulses over the body's neural circuitry to try to alleviate pain,
without drugs. The human body is controlled by electrical signals sent through
the nervous system, which can become distorted after accidents or as a result of
disease. The field of bioelectronic medicine aims to safely correct
irregularities in the nervous system by modifying the electrical language of the
body related to pain relief.
Our mission is to improve global wellness for people suffering from various
painful conditions by relieving chronic and acute pain using energy, frequency
and vibration as an alternative to pharmaceuticals; and one day, read and
modifies electrical signals passing along nerves in the body, to restore
long-term health.
Additionally, we have a corporate goal to offer the public effective
alternatives to addictive pain relieving drugs, such as opiods. According to the
Society of Actuaries, opioid overdose deaths are now the single largest factor
slowing the growth in U.S. life expectancy and has led to stagnation or
decreases in life expectancy three years in a row for the first time since
1915-1918, when the country was facing World War I and the Spanish flu pandemic.
The U.S. Centers of Disease Control and Prevention (CDC) has reported that, from
1999 through 2017, nearly 400,000 have died from overdoses from prescription or
illicit opiods. It is our aim to offer effective alternatives to pain
management.
Critical Accounting Policies
Revenue Recognition
The FASB issued Accounting Standards Update ("ASU") No. 2014-09, codified as ASC
606: Revenue from Contracts with Customers, which provides a single
comprehensive model for entities to use in accounting for revenue arising from
contracts with customers. The Company adopted ASC 606 effective January 1, 2019
using modified retrospective basis and the cumulative effect was immaterial to
the financial statements.
Revenues are recognized in accordance with Accounting Standards Codification
("ASC") 606, Revenue from Contracts with Customers, when performance obligations
are satisfied through the transfer of promised goods to the Company's customers.
Control transfers upon shipment of product and when the title has been passed to
the customers. This includes the transfer of legal title, physical possession,
the risks and rewards of ownership, and customer acceptance. Revenue is recorded
net of sales taxes collected from customers on behalf of taxing authorities,
allowance for estimated returns, chargebacks, and markdowns based upon
management's estimates and the Company's historical experience. The Company's
liability for sales return refunds is recognized within other current
liabilities, and an asset for the value of inventory which is expected to be
returned is recognized within other current assets on the balance sheets.
Equity Issued with Convertible Debt
The Company is required to issue warrants in conjunction with certain
convertible debt. The warrants qualified for equity accounting as the warrants
did not fall within the scope of ASC Topic 480, Distinguishing Liabilities from
Equity. The warrants were measured at fair value at the time of issuance and
classified as equity.
The Company values the warrants using a Black Scholes Merton pricing model and
records the warrants as a reduction of the notes included in the debt discount
balance.
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Results of Operations
The following table sets forth the audited results of our operations for
the years ended December 31:
2022 2021
Net Sales $ 1,149,844 $ 907,362
Cost of goods sold: 261,203 199,234
Gross profit 888,641 708,128
Operating Expenses 2,492,169 4,508,391
Loss from operations (1,603,528) (3,800,263)
Other expense (1,864,972) (4,679,886)
Net Loss $ (3,468,500) $ (8,480,149)January 1, 2022 through December 31,2022 Compared to January 1, 2021 through
December 31, 2021
Our sales totaled $1,149,844 for the year ended December 31, 2022 and $907,362
for the year ended December 31, 2021. The increase is primarily related to an
increase in units sold.
Cost of sales and gross margins for the year ended December 31, 2022 and for the
year ended December 31, 2021 were $261,203 and 77% and $199,234 and 78%,
respectively. Our cost of sales consists of the cost of materials and
distribution expenses. Cost of sales and gross margins are affected by product
mix as well as the mix in the level of sales between commissioned agents and
distributors.
The following table sets forth the operating expenses for the years ended
December 31:
2022 2021 Change
Sales and marketing $ 30,566 92,608 (62,042)
Commissions 220,567 207,264 13,303
Payroll related 963,177 2,441,758 (1,478,581)
Consulting and professional fees 940,954 1,386,758 (445,804)
Research and development 92,299 215,320 (123,021)
Other operating expenses 244,606 164,683 79,923
$ 2,492,169 $ 4,508,391 $ (2,016,222)
The following table sets forth the stock- based compensation expense included in
the above operating expenses for the years ended December 31:
2022 2021 Change
Sales and marketing $ 8,000 $ - $ 8,000
Payroll related 14,703 1,666,716 (1,652,013)
Consulting and professional fees 486,900 963,428 (476,528)
$ 509,603 $ 2,630,144 $ (2,120,541)
Selling, general and administrative expenses consist primarily of payroll
related expenses, commissions, consulting and professional fees, sales and
marketing, research and development and other operating expenses. Selling,
general and administrative expenses totaled $2,492,169 for the year ended
December 31, 2022 and $4,508,391 for the year ended December 31, 2021, a
decrease of $2,016,222 or about 45%. The change is primarily due to decreases in
stock-based compensation expense of $2,120,541, research and development costs
of $123,021 and marketing costs of $62,042, partially offset by non -stock-based
compensation related increases in payroll related costs of $173,432 and other
operating expenses of $79,923. Stock-based compensation expense for the year
ended December 31, 2021, includes $963,428 related to third party agreements for
financial and strategic advisory services, $604,890 related to shares of common
stock issued to the Company's CEO as compensation and $1,061,826 related to
cashless warrants issued to the Company's CEO and a key employee. Stock-based
compensation expense for the year ended December 31, 2022, includes $461,900
related to third party agreements for financial and strategic advisory services,
$25,000 for director's fees and $10,000 for shares of Series A preferred stock
issued to the Company's CEO as compensation.
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The decrease in research and development costs reflects the initial development
payment of approximately $122,000 made under contract in the 2021 period.
Ongoing payments are made upon achievement of certain contractual milestones.
The decrease in consulting and professional fees is the result of stock-based
compensation recorded in conjunction with shares issued for investor relations
and financial advisory services. The decrease in marketing expenses is due to
the termination of various third- party arrangements.
The non -stock-based compensation increase in payroll related costs consists
primarily of additional employee headcount and an increase in bonus paid to the
Company's CEO of approximately $29,000. The non-stock-based compensation
increase in other operating expenses relates primarily to costs associated
public company insurance premiums and increased travel for sales and marketing
efforts.
Other expense decreased by $2,814,914 primarily due to a decrease in interest
expense of $2,522,780, and a decrease in gain in the change in fair market value
of derivative liabilities of $1,415,685, partially offset by a loss on
extinguishment of debt of $1,079,800. The decrease in interest expense reflects
a decrease in the amortization of debt discount related to debt conversions and
maturities that occurred since June 2021 as well as no day 1 derivative loss for
newly incurred debt in the 2022 period, as compared to the 2021 period. All
derivative liabilities were settled as of December 31, 2021.
As a result of the foregoing, we recorded a net loss of $3,468,500 for the year
ended December 31, 2022, compared to a net loss of $8,480,149 for year ended
December 31, 2021. The decrease in net loss is primarily attributed to the
decrease in other expense, the decrease in selling, general and administrative
expenses and increased gross profit.
COVID-19 may impact our business.
On January 30, 2020, the World Health Organization declared the COVID-19
outbreak a "Public Health Emergency of International Concern" and on March 11,
2020, declared it to be a pandemic. Actions taken around the world to help
mitigate the spread of the COVID-19 include restrictions on travel, and
quarantines in certain areas, and forced closures for certain types of public
places and businesses. COVID-19, and actions taken to mitigate it, have had and
are expected to continue to have an adverse impact on the economies and
financial markets of many countries, including the geographical areas in which
we operate. While it is unknown how long these conditions will last and what the
complete financial effect will be to the Company, COVID-19 may have an adverse
effect on our business. While we are taking diligent steps to mitigate any
possible disruptions to our business, we are unable to predict the extent or
nature of these impacts, at this time, to our future financial condition and
results of operations.
Liquidity and Capital Resources
During the year ended December 31, 2022, our cash and cash equivalents decreased
by $14,745 reflecting cash used in operations of $773,337, and net proceeds from
financing activities of $758,592. At December 31, 2022, the Company had a
working capital deficit of $2,276,373 and cash on hand of $368,425.
The Company requires additional capital to service its working capital deficit
and fund future operations. The Company expects to obtain funding through
additional debt and equity placement offerings until it consistently achieves
positive cash flows from operations. If the Company is unable to obtain
additional funding, it may not be able to meet all of its obligations as they
come due for the next twelve months. The continuing viability of the entity and
its ability to continue as a going concern is dependent upon the entity being
successful in its continuing efforts in growing its revenue base and/or
accessing additional sources of capital, and/or selling assets. Our Independent
Registered Public Accounting Firm included an explanatory paragraph regarding
substantial doubt about the Company's ability to continue as a going concern.
As of the date of this filing, the Company is currently in default with one its
lenders, for non-payment of two matured convertible promissory notes issued on
October 13, 2021, and February 11, 2022, with principal and interest due in the
amounts of $78,495 and $95,410, respectively. Further, and as a result of the
Company's sale of its real property on March 15, 2023, the Company is in default
with its unmatured convertible promissory note issued to the lender on September
15, 2022. The convertible promissory notes issued to the lender all contain
provisions for default amounts equal to the principal amounts, plus accrued
interest, and default interest, through the date of repayment, multiplied by
125%.
Separately, and also as a result of the Company's sale of its real property on
March 15, 2023, the Company is in default respecting unmatured convertible
promissory notes issued to two lenders on February 11, 2022, and August 8, 2022,
in the principal amounts of $307,500 and $176,000, respectively, each not
including interest due. One convertible note included a cross-default provision
which required the Company to remit full repayment of interest and principal due
through the date of full repayment multiplied by 125%.
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As of the date of this filing, the note holders have agreed to temporarily waive
the respective defaults, including principal, interest, default penalties, and
default amounts, and to enter into negotiations to reform the respective
outstanding convertible notes payable. Accordingly, no amounts were accrued as
a result of the defaults.
Operating Activities
Cash flows used in operating activities totaled $773,337 for the year ended
December 31, 2022 as compared to cash flows used of $1,193,688 for the year
ended December 31, 2021. The decrease in cash flows used in operating activities
is primarily the result of improved operating results, a decrease in inventory
purchases and deposits and increased customer deposits, partially offset by an
increase in accrued expenses and other current liabilities.
Financing Activities
Cash flows provided by financing activities totaled $758,592 for the year ended
December 31, 2022 as compared to $1,311,945 for the year ended December 31,
2021. The cash flows provided in the 2022 period reflect $1,545,140 in net
proceeds from convertible promissory notes and $42,766 from the sale of common
stock, partially offset by repayment of convertible promissory notes and related
party notes payable totaling $803,959. The cash flows provided in the 2021
period are primarily the result of $1,510,000 in net proceeds from convertible
promissory notes partially offset by related party notes payable repayments
totaling $158,875.
During the year ended December 31, 2022, the Company issued convertible
promissory notes to certain investors totaling $1,859,480 with net proceeds of
$1,545,140. Original issue discount totaling $185,580, loan costs totaling
$128,760 and the fair value of warrants issued or to be issued to third party
advisors of $110,552 have been recorded as a discount on the notes. The notes
accrue interest at 12% per annum and have initial conversion prices of
$0.015-$0.025, with the exception of one note, subject to adjustment and mature
nine months to one year from issuance. One note is only convertible upon default
and at a 25% discount to trading prices during the ten days prior to conversion
election. As additional consideration for the financings, the Company issued
the lenders three to five-year warrants to purchase a total of 21,000,000 shares
of common stock at an initial price of $0.025 per share, and three to five-year
trigger warrants to purchase a total of 173,000,000 shares of common stock at
$0.015- $0.025 per share, subject to price adjustments for certain actions,
including dilutive issuances. The relative fair value of the warrants totaling
$385,422 has been recorded as a discount on the notes. The trigger warrants may
only be exercised if the convertible promissory notes are not paid in full at
the maturity dates. The warrants do not provide for registration rights. As of
the date of this filing, warrants to purchase 25,000,000 shares of common stock
have been triggered.
In January and February 2022, the Company sold 1,500,000 shares of common stock
at prices ranging from $0.0259- $0.0353 under a stock purchase agreement with
net proceeds totaling $42,766.
Related Party Transactions
We follow FASB ASC subtopic 850-10, "Related Party Transactions", for the
identification of related parties and disclosure of related party transactions.
Pursuant to ASC 850-10-20, related parties include: a) affiliates of the
Company; b) entities for which investments in their equity securities would be
required, absent the election of the fair value option under the Fair Value
Option Subsection of Section 825-10-15, to be accounted for by the equity method
by the investing entity; c) trusts for the benefit of employees, such as pension
and profit sharing trusts that are managed by or under the trusteeship of
management; d) principal owners of the Company; e) management of the Company; f)
other parties with which the Company may deal if one party controls or can
significantly influence the management or operating policies of the other to an
extent that one of the transacting parties might be prevented from fully
pursuing its own separate interests; and g) other parties that can significantly
influence the management or operating policies of the transacting parties or
that have an ownership interest in one of the transacting parties and can
significantly influence the other to an extent that one or more of the
transacting parties might be prevented from fully pursuing its own separate
interests.
Material related party transactions are required to be disclosed in the
financial statements, other than compensation arrangements, expense allowances,
and other similar items in the ordinary course of business. The disclosures
shall include: a) the nature of the relationship(s) involved; b) a description
of the transactions, including transactions to which no amounts or nominal
amounts were ascribed, for each of the periods for which statements of operation
are presented, and such other information deemed necessary to an understanding
of the effects of the transactions on the financial statements; c) the dollar
amounts of transactions for each of the periods for which statements of
operations are presented and the effects of any change in the method of
establishing the terms from that used in the preceding period; and d) amounts
due from or to related parties as of the date of each balance sheet presented
and, if not otherwise apparent, the terms and manner of settlement.
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Off Balance Sheet Arrangements
As of December 31, 2022, and 2021, we did not have any off-balance sheet
arrangements that have, or are reasonably likely to have, a current or future
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
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ELECTROMEDICAL TECHNOLOGIES, INC. 